Hope and fears in Brazil

An impeachment with ripples

by David Smith in Buenos Aires

Tue 19 Apr 2016

Brazil has entered a political no man’s land after the lower house of congress voted to impeach President Dilma Rousseff, with hundreds of thousands of people on the streets denouncing her leadership. Yet amid the uncertainty, realisation is growing across all parties that change has to come, starting with policies to tackle the economic crisis.

Fallout will ripple across the region from the demise of Rousseff and the Workers’ party that has ruled Latin America’s heavyweight since 2002. Her immediate successor Michel Temer has told us he favours the road taken by neighbouring Argentina under Mauricio Macri, its new president.

As Brazil absorbed Rousseff’s dramatic rejection, the new government in Buenos Aires received a significant vote of confidence from global investors prepared to bet on Macri’s agenda of deficit reduction, debt settlement and reopening Argentina for business.

A $15bn bond issue, designed to enable Argentina to settle with hold-out creditors from its 2001 default, was heavily oversubscribed, enabling the government to reduce interest rates on the bond as it went on offer in London and New York.

‘Argentina represents something of a road map for us. We have to return to pro-growth, pro-market policies to dig ourselves out of this hole,’ says a former adviser to Brazil’s first Workers’ party government, now openly disillusioned. ‘The question is whether Rousseff's likely successor will be given the time, or the freedom by the people, to confront the challenge.’

Within the next 10 days Brazil’s senate will vote on whether to suspend the president for 180 days and launch full impeachment proceedings, making Temer interim leader. That senate vote, requiring a simple majority, seems a foregone conclusion after Rousseff lost in the lower house, a body much more favourably disposed to her and her party.

Temer, a dapper 75-year-old lawyer and veteran politician, married to a former beauty queen four decades younger, has indicated he will carry out economic reforms that follow the manifesto of his centrist Democratic Movement party.

‘That means serious spending limits, government debt reduction, free trade, and a smaller role for state enterprises,’ according to one of his economic advisers. ‘As acting president, Temer will restore investor confidence and reignite the Brazilian economy.’

The names floated by the Temer team in the immediate aftermath of Rousseff’s loss on Sunday night suggest deep-seated change. Two former central bank chiefs, with broad support from finance and business, are being touted as possible finance ministers. The head of Goldman Sachs in Brazil may take another senior role.

Political momentum has helped the currency and the Bovespa stock market rebound, but beyond Temer’s words of serious intent lies the fear that the next government may have a short honeymoon. The acting president is largely unknown to the masses, and almost as unpopular as Rousseff.

‘The first two to three months of a new government will be critical,’ says one of Brazil’s leading commentators. ‘If they can avoid mass protest, while implementing change, they have a window to arrest our decline. But it’s a big If. They don’t have the option of gradualism.’

The rest of Latin America is watching intently. Agents of economic reform in Argentina, Peru, Colombia and Mexico see Brazil’s crisis as a sign of change throughout the region. ‘In the medium-term, Brazil can yet become the key factor in the region, recognising that our future depends on embracing markets and market forces, not denouncing them,’ says a member of Macri’s economic team in Argentina.

David Smith, OMFIF Advisory Board member, represented the UN Secretary-General in the Americas for more than a decade.